Thursday, August 31, 2006

FOREX-Euro extends gains after Trichet comments

(Repeats to add dropped word "President" from first paragraph) (Recasts, updates prices, adds comment, U.S. data, ECB comment, changes byline, dateline; previous LONDON)

By Gertrude Chavez-Dreyfuss

NEW YORK, Aug 31 (Reuters) - The euro extended gains against the dollar on Thursday after European Central Bank President Jean Claude-Trichet signalled that the bank may have to raise interest rates soon to stem inflation in the euro zone.

In contrast, U.S. government data showed benign inflationary pressures in July, which had little impact on the dollar as it reinforced expectations that the Federal Reserve would be in no rush to hike rates.

"Trichet sounds hawkish to me and therefore all systems go for an ECB rate hike in October," said Boris Schlossberg, senior currency strategist at Forex Capital Markets in New York.

Trichet, in comments after the bank held interest rates steady at 3.00 percent, said "strong vigilance" on inflation was needed, an indication the bank will likely raise rates soon.

"His comments are weighing on the dollar. They're really as expected but the fact that he is reaffirming his hawkishness exacerbates the chances of a rate increase," Schlossberg said.

The euro rose to session highs around $1.2880 after Trichet's comments, before trading back down to $1.2874 , up 0.3 percent on the day.

Analysts said the weaker-than-expected rise in the core personal consumption expenditure (PCE) index, a key measure of U.S. inflationary pressures, would likely weigh on the dollar. The index rose just 0.1 percent last month, below market forecasts for an increase of 0.2 percent.

"Core PCE index posted a smaller-than-expected gain, that should reinforce the view that there is no urgency for the Fed to raise interest rates again," said Alex Beuzelin, senior market analyst, at Ruesch International in Washington.

"They have room to see whether or not the slowing economy would be sufficient to moderate inflation pressures. pressures. Bottomline, this is a negative for the dollar and that should keep it trending lower," he added.

Futures markets showed perceived chances of a Federal Reserve interest rate hike at its Sept. 20 meeting at 12 percent, unchanged from levels before the data was released. The Federal Reserve kept the federal funds rate at 5.25 percent earlier this month.

The dollar pared gains against the yen, trading flat on the day at 117.03 yen , after earlier climbing to a one-month high of around 117.48, according to electronic trading platform EBS. The yen posted broad losses on Thursday after weak Japanese industrial output data cemented expectations the Bank of Japan would take its time raising interest rates.

The Japanese currency again hit a record low against the euro at 150.73. The pair last traded at 150.59 , up 0.2 percent from late on Wednesday.

The yen also hit a new trough against sterling at 223.83 yen .

Next up would be the Chicago Purchasing Manager's Index due at 10:00 am (1400 GMT) and expected to show a slip to 57.0 in August from 57.9 the previous month.

Fed Chairman Ben Bernanke is expected to take questions after speaking in South Carolina later in the day.

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